The SEC has announced settled fraud charges against Ideanomics, Inc, formerly known as Seven Stars Cloud Group, Inc, and its former Chairman and CEO, Zheng (Bruno) Wu, for misleading the public about the company’s financial performance between 2017 and 2019.

The SEC also announced settled charges against Ideanomics’ current CEO, Alfred Poor, and former CFO, Federico Tovar, for their roles in the scheme.

“The investing public must be able to trust the accuracy of a company’s disclosures, and we will hold accountable executives who abuse that trust by engaging in fraud,” said Stacy Bogert, Associate Director of the SEC’s Division of Enforcement.

Revenue reporting

The SEC’s order alleges that, in November 2017, Ideanomics and Wu reported 2017 revenue guidance of $300m, despite numerous known issues indicating that the company would miss this guidance by a wide margin. The company later reported only $144m in 2017 revenues.

The SEC also alleges that Ideanomics and Wu also misled the company’s auditor with a fraudulent letter of intent from a purportedly interested buyer of certain assets to avoid writing down those assets by $17m in 2017. And that Wu improperly hid his personal interest in two companies that received millions in cash and stock from deals with Ideanomics between 2017 and 2019.

Ideanomics, Wu, Poor, and Tovar are further alleged to have improperly accounted for a deal involving crypto assets in 2019, resulting in the company’s overstatement of revenues by more than $40m, and made false representations in company financial statements.

In its order, the SEC said: “Ideanomics fraudulently and materially misstated the financial statements in its 2017 and 2018 Form 10-K filings, as well as its Form 10-Q filings for the first, second, and third quarters of 2018, by failing to impair the value of certain licensed video content.” And the agency said the company made material misstatements in its quarterly filings for the first three quarters of 2018 by improperly accounting for oil transactions on a gross, rather than a net basis.

The executives

The order cites Poor, Wu and Tovar for a variety of either deliberate actions, failures to act and “knew or should have known” actions they each took that affected the value and the amount of Ideanomics’s reported revenue.

Ideanomics agreed to a $1.4m penalty and to retain an independent compliance consultant to review and make recommendations as to the company’s internal accounting controls.

The SEC also alleges Poor and Tovar had performed positive evaluations of the Company’s internal control over financial reporting (ICFR), even though the evaluation of ICFR was incomplete. Given their roles and responsibilities as CEO and CFO respectively, Poor and Tovar knew or should have known that their statements were false, the SEC said.

The SEC said Ideanomics’s Form 10-Q for the second quarter of 2019 was signed by Carla Zhou as interim CFO, plus two SOX certifications were purportedly signed by her, all despite the fact that Zhou could not speak or read English and had not actually reviewed or signed the Form 10-Q or the certifications prior to the filing.

Rules violations

Among other rules cited in the SEC’s order, Section 13(a) of the Exchange Act (and SEC Rule 13(a)) require public issuers to file annual and quarterly reports with the Commission, and mandate that such reports contain such further material information necessary to make the required statements not misleading.

Rules 13a-15(a) and (c) require issuers to maintain and evaluate the effectiveness of internal control over financial reporting.

Rule 13b2-2 under the Exchange Act prohibits officers and directors from making (or causing to be made) materially false or misleading statements to an accountant in connection with any audit, review, or examination of a company’s financial statements or in connection with the preparation or filing of any document with the SEC.

Settlement and penalties

In a written statement obtained by MarketWatch, Ideanomics said the company and its management fully cooperated with the SEC, adding the settlement “draws a line” under nearly six years of interaction with the agency.

Without admitting or denying the SEC’s findings, all respondents settled the matter by agreeing to cease and desist from future violations of the charged provisions.

Wu agreed to pay more than $3.3m in disgorgement and prejudgment interest and a $200,000 penalty. Tovar and Poor each agreed to pay a $75,000 penalty.

Ideanomics agreed to pay a $1.4m penalty and to retain an independent compliance consultant to review, assess, and make recommendations as to the company’s internal accounting controls.

Finally, Wu agreed to a 10-year officer and director bar, and Tovar agreed to be suspended from appearing and practicing before the SEC as an accountant for at least two years.

The company is incorporated in Nevada with its principal place of business in New York and is focused on what it calls “accelerating the commercial adoption of electric vehicles by bringing proprietary vehicle and charging technologies together.” But the EV business is far from being its original business model. Over a decade ago, the company provided video-on-demand services under the brand name “You-on-Demand,” with its primary operations in China.

And it changed its business model several times, including attempting to develop petroleum trading products, artificial intelligence, and financial technology.